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Consumer protection and contingent charges

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  • Armstrong, Mark
  • Vickers, John

Abstract

Contingent charges for financial services, such as fees for unauthorized overdrafts, are often controversial. We study the economics of contingent charges in a stylized setting with naive and sophisticated consumers. We contrast situations where the naive benefit from the presence of sophisticated consumers with situations where competition works to subsidize the sophisticated at the expense of the naive, arguably unfairly. The case for regulatory intervention in these situations depends in good part, but not only, on the weight placed on distributional concerns. The economic and legal issues at stake are well illustrated by a case on bank charges recently decided by the UK Supreme Court.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 37239.

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Date of creation: Mar 2012
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Handle: RePEc:pra:mprapa:37239

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Keywords: Consumer protection; retail banking; bounded rationality; economics of contracts;

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References

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  1. Stefano DellaVigna & Ulrike Malmendier, 2006. "Paying Not to Go to the Gym," American Economic Review, American Economic Association, American Economic Association, vol. 96(3), pages 694-719, June.
  2. Laibson, David I. & Gabaix, Xavier, 2006. "Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets," Scholarly Articles 4554333, Harvard University Department of Economics.
  3. Victor Stango & Jonathan Zinman, 2011. "Limited and Varying Consumer Attention: Evidence from Shocks to the Salience of Bank Overdraft Fees," NBER Working Papers 17028, National Bureau of Economic Research, Inc.
  4. Diamond, Peter A., 1971. "A model of price adjustment," Journal of Economic Theory, Elsevier, Elsevier, vol. 3(2), pages 156-168, June.
  5. Spiegler, Ran, 2014. "Bounded Rationality and Industrial Organization," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780199334261, October.
  6. Kosfeld, Michael & Schüwer, Ulrich, 2011. "Add-on Pricing, Naive Consumers, and the Hidden Welfare Costs of Education," CEPR Discussion Papers, C.E.P.R. Discussion Papers 8636, C.E.P.R. Discussion Papers.
  7. Mark Armstrong & John Vickers & Jidong Zhou, 2009. "Consumer Protection and the Incentive to Become Informed," Journal of the European Economic Association, MIT Press, MIT Press, vol. 7(2-3), pages 399-410, 04-05.
  8. Francesco Squintani & Alvaro Sandroni, 2007. "Overconfidence, Insurance and Paternalism," Economics Discussion Papers, University of Essex, Department of Economics 643, University of Essex, Department of Economics.
  9. Michael D. Grubb, 2012. "Consumer Inattention and Bill-Shock Regulation," Boston College Working Papers in Economics, Boston College Department of Economics 828, Boston College Department of Economics.
  10. Schwartz, Alan & Wilde, Louis L., 1983. "Imperfect Information in Markets for Contract Terms: The Examples of Warranties and Security Interests," Working Papers, California Institute of Technology, Division of the Humanities and Social Sciences 480, California Institute of Technology, Division of the Humanities and Social Sciences.
  11. Cooper, Russell & Ross, Thomas W, 1984. "Prices, Product Qualities and Asymmetric Information: The Competitive Case," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 51(2), pages 197-207, April.
  12. Victor Stango & Jonathan Zinman, 2009. "What Do Consumers Really Pay on Their Checking and Credit Card Accounts? Explicit, Implicit, and Avoidable Costs," American Economic Review, American Economic Association, American Economic Association, vol. 99(2), pages 424-29, May.
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Cited by:
  1. Wenzel, Tobias, 2014. "Consumer myopia, competition and the incentives to unshroud add-on information," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 98(C), pages 89-96.
  2. Wenzel, Tobias, 2013. "Consumer myopia, competition and the incentives to unshroud add-on information," DICE Discussion Papers 126, Heinrich‐Heine‐Universität Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
  3. Nick Vikander, 2014. "Sellouts, Beliefs, and Bandwagon Behavior," Discussion Papers 14-15, University of Copenhagen. Department of Economics.
  4. Armstrong, Mark, 2014. "Search and Ripoff Externalities," MPRA Paper 57958, University Library of Munich, Germany.
  5. Kosfeld, Michael & Schüwer, Ulrich, 2014. "Add-on pricing in retail financial markets and the fallacies of consumer education," SAFE Working Paper Series 47, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.
  6. John Ashton & Andros Gregoriou, 2014. "The role of implicit costs and product quality in determining the customer costs of using personal current accounts," Working Papers 14001, Bangor Business School, Prifysgol Bangor University (Cymru / Wales).

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